Tramping and personal finance epiphanies seem to go hand and hand. It's surprising how often the conversation turns to personal finance on my weekend tramps.
A few weeks ago the conversation turned to a friend's diet. She likened belonging to Weight Watchers to having a budget. She knows how to diet as well as how to budget, yet takes the time to monitor her budget and attend Weight Watchers meetings.
Why, her friends asked, did she need to join Weight Watchers? The answer was that even though she eats healthily, the weight loss wasn't happening. It was the last 10 per cent that was falling through the cracks. "It's the same as budgeting," she said. If you don't have a written budget and follow it the discipline wanes.
Budgeting should be easy, but all too many Kiwis fall into these common traps:
1. Having no budget. If you never write your income and expenditure down or enter it in a spreadsheet or app, money simply vanishes. "We see a lot of people who are intimidated by the idea of a budget," says Julie Navatsyk, communications manager at Christians Against Poverty. Don't expect to do it overnight. Even if you can't track every dollar, knowing what you spend now can change behaviour. I know. The first time I became really aware of the shocking financial cost of alcohol was when I kept a spending diary for a month in my 20s - at a time when I frequented wine bars with colleagues and friends. That habit was modified mighty fast.
2. Not sweating the small stuff. One of the biggest financial mistakes we all make is failing to value our small change. It may only cost $2 to pick up a tasty morsel in the bakery or to buy the kids an ice cream. This is small but dangerous spending. In fact $5 a day on this incidental stuff adds up to $1825 a year. A converse mistake is to spend all your efforts on the small stuff and forget the big picture. Upgrading the car when it's not necessary costs more than the incidentals. Combine both savings and there is a tidy sum left over to tuck away.
3. Not being honest. One of the big budgeting mistakes the Commission for Financial Literacy and Retirement Income sees is people being dishonest with themselves or their partners, says David Kneebone, executive director. Often one partner thinks the other doesn't need to know about certain spending. It's a comment echoed by budget advisers who may spend several sessions with a couple trying to figure out where the $150 a week surplus in the budget goes. Eventually it turns out that the $40 a week he says he spends at the pub on Friday nights is really $100. She might hide the expensive perfume or makeup purchases from him. Or it could be hidden gambling. According to the Department of Internal Affairs, $3600 per man, woman and child was spent on gambling in the year to June 2012.
4. Not opening the bills. Darryl Evans, chief executive of Mangere Budgeting Services, says it's common for people to ignore bills - often throwing unopened envelopes in the rubbish. As a result they have no idea how much is owed, when the bills are due and consequently they don't pay them. "When creditors see you ignoring notices, that is when it escalates," says Evans. If you're up front with creditors, new payment schedules might be worked out. Evans' staff sit with clients and teach them how to organise their bills. They even supply the manila folders, paper, staplers and other stationery for the job. It must work because 74 per cent of the service's clients eventually learn to manage their finances.
5. Mental accounting. Numbers kept in your head have a way of morphing. As a result we make decisions that don't make sense. Why, for example, is a tax refund or bonus "free money" to spend, whereas had it been built into our income we might have saved the same amount? Or why is it we'd spend 10 minutes to save $5 on a $10 item, but not to save $5 on a $250 item? Both save the same amount of money, but one seems more valuable than the other thanks to mental accounting. While humans can be rational, our brains let us down when it comes to money and we make faulty decisions. Behavioural economists study this. Anyone who wants a layman's insight into their work should read Why Smart People Make Big Money Mistakes, by Gary Belsky.
6. Buying on impulse. I'm guilty of this one - occasionally - especially in the supermarket. I shop with a list, but invariably there are a few items I just can't resist and they might add up to $20. Last week one of the offending items was the Cyclops Bliss Mango Passion yoghurt that had my name on it. Admittedly expensive yoghurt is a fairly small financial crime. Even so $5 here or there soon adds up. The infamous daily $4.50 latte costs more than $1600 a year. Anyone who makes leisure visits to the mall or peruses Trade Me for fun is bound to buy bigger items on impulse. Some people's impulsive spending ranges from clothing, to furniture, electronics and, in the case of one friend, a puppy. Another such spending trap is going out with friends for a quick drink after work, which turns into an expensive dinner in a restaurant. Whatever your foible, identifying it as a budget buster is what matters.
7. Being too frugal. If you can't have some slack in your spending, what's the point? Being too frugal makes people miserable. Professional budget advisers recommend including spending money in the budget. That might be his and hers money, holiday money or just money to spend on lunches. What's more, being frugal isn't the same as budgeting. Just because you buy goods on sale doesn't mean that money isn't slipping through the cracks.
8. Dipping into your savings. Tom Hartmann at the Commission for Financial Literacy blogged recently on sorted.org.nz about the mistake he made with his family budget - before he began using Sorted's budgeting tools. That was to allocate one-third of his single-income family's budget to savings. He did the right thing by putting it aside at the beginning of every month, but kept dipping into it. Setting unrealistic goals affects budgeting in the same way it does dieting. If the goals are unworkable, the diet or budget fails. If you're dipping into your regular savings, then changes need to be made or that money made sacrosanct. Make sure before setting the figure, however, that you've included periodic expenses such as holidays, insurance, school fees and car repairs.
9. Thinking you need to be perfect. No human is perfect or 100 per cent disciplined. A budget is an example to live by. If it all goes awry one month, then accept it. If there's a problem month after month, adjust it. This way you'll still be budgeting come August, says Rob Collins, general manager of the NZCU credit union. Being too optimistic with your budgeting can lead to failure, he adds. Too often people think they can get out of debt faster than is humanly possible. That leads to disappointment, which in turn gives the person a negative attitude to budgeting.
10. Giving up. Don't give up. Look for a better system instead. Budgeting doesn't have to take a lot of time - especially if you do most of your spending on cards. The statements can be used to track the success or otherwise of the budget. It's easy to set up an online budget. Both Kiwibank's heaps.co.nz and ANZ's ANZmoneymanager.com are available to anyone.
There are other good finance and budgeting packages available such as XeroPersonal and many smartphone apps.